Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450
Cash flows: Year 1 = $325
Year 2 = $65
Year 3 = $100
A) 3.43 years
B) 3.17 years
C) 2.88 years
D) 2.6 years

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. By the end of Year 2, the cumulative cash flow is $390 ($325 + $65). In Year 3, an additional $60 is needed to reach $450, which takes 0.6 years ($60/$100). Thus, the payback period is 2.6 years.

Compute the Payback Period for a Project with the Following